Perpetual Inventory Method

What is the Perpetual Inventory Method?

The perpetual inventory method is a method of accounting for inventory that records the movement of inventory on a continuous (as opposed to periodic) basis. It has become more popular with the increasing use of computers and perpetual inventory management software.

Although the perpetual inventory system can be more expensive and time consuming to maintain, it has the advantage that the accounting records always reflect the levels of inventory on hand at any point in time, allowing real time management of inventory.

Under the perpetual inventory method each time there is a movement, perpetual inventory system journal entries are processed to record the change. Purchases are debited to inventory and sales are credited to inventory, with the debit going to the cost of goods sold account.

At the end of an accounting period, the balance on the perpetual inventory account should be the same as the physical inventory available. Differences will arise due to accounting errors, theft, shrinkage etc. An inventory count is normally carried out at least once a year to allow for discrepancies to be investigated and corrected,

For further information see the Wikipedia perpetual inventory definition.

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Last modified January 28th, 2018 by Team

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